News Column

On a diplomatic tightrope

June 1, 2014

In spite of United States and European sanctions against Russia, in May Qatar's sovereign wealth fund (SWF) agreed to invest $2 billion in Russia. The agreement came less than a month after Bahrain's sovereign wealth fund also agreed to pursue investments in Russia, following a high profile visit to Moscow by Bahrain's crown prince, and a raft of agreements designed to enhance trade, investment and defence ties between the two countries.

The decision by the two Gulf countries to strengthen investment ties with Russia are likely to have angered the US administration, which along with the European Union has imposed sanctions on individuals close to Russia's president Vladimir Putin, as result of Russia's intervention in Ukraine.

Qatar's SWF, the Qatar Investment Authority, has agreed to invest with the $10 billionRussian Direct Investment Fund (RDIF), which makes equity investments in Russia, and invests alongside foreign partners. The RDIF, which was set up three years ago by president Putin, has been wooing investors, particularly from the Gulf states and Asia, to invest in Russian infrastructure projects. It has previously attracted money from other Gulf SWFs, including the Kuwait Investment Authority and Abu Dhabi'sMubadala Development Company.

Although the RDIF has not been directly targeted by sanctions, a member of RDIF's supervisory board, Sergei Ivanov, who is president Putin's chief of staff, was in March included on the sanctions list, which targets individuals and companies linked to the Russian president.

The RDIF's chief executive, Kirill Dmitriev, announced the agreement with Qatar at a meeting between the Russian president and foreign investors during the annual St Petersburg Economic Forum. The conference took place under the shadow of sanctions; US financiers reportedly avoided the investment conference on advice from the White House. However Dmitriev argued that "longer-term investors take a longer-term view on Russia. They see some turbulence but realise it is impossible to isolate the sixth-largest economy in the world.

"We are pleased that we are actively working with investors from around the world, but we are also particularly focused on investors from Asia, and the Middle East, as 90 per cent of all our funds involves these investors," Dmitriev said. The China Investment Corporation said it wanted to commit more money to Russia. Days later, China and Russia signed a 30-year, $400 billion deal in which Russia'sGazprom will deliver Russian gas to China, an agreement which underscores Russia's shift towards Asia amid strained relations with the west.

Qatar's relationship with Russia has been strengthening in recent years. In May, Qatar Holding, along with the SWFs of Norway and Azerbaijan and the China Construction Bank, bought about 55 per cent of the new shares on offer from VTB, Russia's second-largest bank.

QIA's chief executive, Ahmad Mohamed al Sayed, was appointed to RDIF's advisory board last year, joining other board members, including the head of Abu Dhabi state fund Mubadala and the Kuwait Investment Authority. In 2013, the RDIF announced a partnership with Mubadala in which they would invest $1 billion each. Also last year, the Abu Dhabi Department of Finance signed a co-operation deal, committing it to investing some $5 billion in Russian infrastructure projects in partnership with the RDIF. The Kuwait Investment Authority also committed to investing $500 million in 2012.

Meanwhile in April this year, Bahrain's crown prince, Shaikh Salman bin Hamad al Khalifa, visited Moscow at the invitation of the Russian prime minister Dimitry Medvedev, setting in motion a raft of investment and defence agreements. Bahrain's$7.1 billion SWF, Mumtalakat, signed a memorandum of understanding (MoU) with the RDIF to work jointly on investment opportunities. Mahmood al Kooheji, Mumtalakat's chief executive, joined the fund's international advisory board.

"We are delighted to partner with Mumtalakat, which is recognised by the international community for its continued commitment to transparency and corporate governance," Dmitriev had said.

In another significant development, the Bahrain Defence Force also signed a contract with the Russian state-owned arms exporter, Rosoboronexport. Few details have emerged about the contract but reports from Bahrain's state news agency said it would "enhance Bahrain's defence capabilities" through the provision of an "advanced defence system".

Bahrain also signed an MoU with the Russian civil aviation authority to allow direct flights between Bahrain and Moscow. Gulf Air, Bahrain's national airline, will open a direct route between Moscow and Manama soon, while the authorities have also revised visa policies to make it easier for Russians to travel to Bahrain.

It is likely that Bahrain is hoping to deepen relations with Russia in order to secure a gas deal. The kingdom has been struggling to meet rapidly rising gas demand and will need to import liquefied natural gas (LNG) to meet its needs. Despite talks with Russia'sGazprom, the kingdom has not yet lined up an agreement. However as investment ties deepen, it is likely that the prospect of securing gas supplies has been on the top of the agenda.

Bahrain's decision to enhance ties with Russia have, however, angered the US. A US state department official said the US disapproved of the kingdom's decision to "conduct business as usual" with Russia, and said it had raised its concerns with the Bahraini government.

"This is not the time for any country to conduct business as usual with Russia," a state department official said. No criticism has yet emerged from the US over Qatar's investment agreement with the RDIF. However, given both Qatar's and Bahrain's strategic significance to the US, as the base for the US Navy's Fifth Fleet and a major air operation centre respectively, the US is unlikely to criticise either countries' dealings with Russia too strenuously.

Nonetheless, Gulf countries are likely to be treading carefully given the sanctions risk and their detrimental impact on Russia's economy, as well as the potential for straining their relations with the EU and US as efforts to contain the crisis in Ukraine continue. The IMF in April cut its growth forecast for Russia's economy to 0.2 per cent from 1.3 per cent, warning of "considerable downside risks".

Trade between the GCC and Russia has not, however, been historically significant. According to research from the Economist Intelligence Unit, trade with Russia and Eastern Europe accounted for less than one per cent of the Gulf Co-operation Council's (GCC) total, which, despite growing by an average 17 per cent per year over the last 30 years, amounted to only $8.7 billion in 2008 (and dipped to $4.7 billion in 2009). Part of this can be attributed to the fact that both regions are gas producers. However, as Kuwait has been a net gas importer since 2009, and Bahrain is actively seeking to secure more supplies, there is a likelihood that trade will rise if deals are secured.

In terms of international relations, since the Arab Spring Russia has pursued a more active diplomatic policy in the Gulf, particularly as US relations with its Gulf allies deteriorated over the US handling of the Egyptian revolution and the conflict in Syria. Russia's support for the Assad administration in Syria and for Iran has, however, strained relations, particularly with Saudi Arabia, which has pushed for Syrian president Bashar al Assad's removal and the containment of Iran.

Meanwhile Russia's assertiveness over Syria has become more prominent. In late May, president Assad said that Russia's veto of the UN Security Council's resolution "saved the whole of the Middle East, rather than just Syria", at a meeting with the Russian deputy prime minister Dmitry Rogozin in Damascus. On 22 May, both Russia and China vetoed a UN Security Council resolution to refer the Syrian crisis to the International Criminal Court for investigation of possible war crimes. It marked the fourth time that Russia and China had used their veto power as permanent council members to stop action against the Assad administration.

Russia has also looked to fill a void left by the US in other areas of the Middle East. For example, in a November visit to Cairo, Russia's foreign minister suggested making investments in Egypt in nuclear energy and tourism; while offering billions of dollars in weapons sales. The visit followed rapidly on from a US decision to suspend military and financial aid to Egypt.

In February it emerged that Russia was negotiating an arms contract with Egypt worth $2 billion. Russia is, however, unlikely to replace the US as the primary security guarantor for the Gulf states anytime soon.

Although the Gulf states are likely to tread carefully to avoid risking tensions with the EU and US, the GCC's deepening of investment ties with Russia are likely to continue.

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Source: Gulf, The (Bahrain)

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